Explain How a Zero Coupon Bond Can Create Taxable Income

question 31

Essay

Explain how a zero coupon bond can create taxable income during a year in which the bond pays no interest payments.Also,explain how the annual taxable amount can be computed.

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Definitions:

Double Declining-balance

An accelerated method of depreciation where the book value of an asset is reduced at double the rate of its straight-line depreciation.

Net Income

The amount of profit remaining after all expenses, taxes, and costs have been subtracted from total revenues.

Units-of-production Method

A method of depreciation that allocates the cost of an asset based on its usage, production, or units of activity rather than the passage of time.